A rare negative rig count, an actual plan from the Biden administration, and the EU’s wet noodle of a banning mechanism.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian bringing you a slightly delayed episode of Monday Madness on May 31, 2022. Yes, I know, we are releasing this episode on a Tuesday, but what did you expect? Yesterday was Memorial Day, and I was busy working on my now painful sunburn without even knowing it. A few more burns like this and I should be good for the summer. As for you folks, I hope the time off was nice and you were able to get out on some trips or at least a fun few evenings in. While we do believe it is important to never stop growing, it is also important to kick back and relax every so often. But this is not a podcast where I lecture folks on a healthy life balance. No, this is the RARE PETRO podcast, so it is time we begin to discuss some energy-related statistics.
First up, commodity pricing. WTI has been all over the board in recent weeks and has been swinging as far as a few dollars in a single days’ time span. Last week opened around $110 and jumped up to about $114 by Thursday. Today’s highest price point was $119, but the price has cooled off a bit and now sits at $117.50. In many prior episodes of Monday Madness we would have clear factors pushing commodity prices. COVID. Infrastructure attacks. Political discourse. Now, it seems that the only thing dictating prices is the returning demand of energy (positive pressure) and the negative sentiments surrounding “fossil fuels” and the refusal to understand Russia’s role in providing energy (negative pressure). This simple supply and demand driven increase in energy prices looks like it is ready to run up to ridiculous territory, and the tighter supplies get, the more likely we are to see a $150 barrel of WTI. Natural gas is an entirely different story, as markets are fighting hard to keep its value below $9. Outside of a few specific instances in which temperatures were higher than historically typical, weather has been brisk across the United States and demand for heating is decreasing, leading to a decreased demand of natural gas as well. Still, as we get further into the summer, I expect the demand for natural gas to go back up and strain already tight supplies. Otherwise, it will remain at about $8.50, where it is at this very moment. Still, that is not to say that the commodity has been relatively stable. Last Thursday we saw prices peak at about $9.40, so anything is possible on this commodity roller coaster ride.
Next up is the rig count which has been absolutely popping off in recent weeks. This week’s results? 727 rigs, which is one less rig than we had this time last week, and 270 more than we had this time last year. No, you heard me right, that is a rig count of negative one for the week, which is curious considering last week’s plus 14 and the previous week’s plus 9. I was curious how many negative rigs counts we have experienced since 2021, so I did a little data work and discovered that the number was 7. 7 total weeks in which the rig count was negative, and of those weeks, 5 of them were a negative one. The other two were 11 and 3. Overall, it’s not so bad to be able to count all the weeks of negative rig counts for the last 17 months on two hands. Diving a little deeper we see lots of push and pull from each of the basins. Almost every major basin saw either a one rig gain or a one rig loss. State by state it gets a little cleaner. Texas and Oklahoma are up one. Louisiana is down 3. Even the Gulf of Mexico took a little hit and fell 2 rigs to 15. Ultimately, it is hard to complain when the rig count comes out as negative one after you are up 270 rigs on the year, so a good week for the rig count.
To wrap up our statistics we will visit the inventory data we explored last week with a nice glass of wine. I recommend you check it every Thursday on www.rarepetro.com, but here is what you missed in case you didn’t catch it. Despite a strong drawdown of more than 3 million barrels last week, the EIA’s data expected a drawdown of almost three-quarter million barrels. They were almost correct as the actual drawdown was a clean 1 million barrels. The API predicted an even smaller drawdown but reported a build of around a half-million barrels. We haven’t witnessed back-to-back draws since the end of March, but the pattern would suggest that we are due for a build next week. The magnitude of that build? It could really go either way. Gasoline saw another draw, but at only a half-million barrels. This is greatly appreciated as this slows the plummet into a somewhat controlled crash landing on our graph of declining domestic inventories. Quickly decreasing inventory and increasing demand has resulted in continually increasing prices (though not as aggressively as before). Last week’s gasoline prices were just over a cent cheaper, so it seems we are encountering high resistance. Go ahead and pray for more resistance because unadjusted price analysis shows that we are now experiencing gasoline prices more expensive than they were during the 2008 financial crisis, or more simply: the most expensive gasoline the United States of America has ever seen. Propane inventories are business as usual. I wish we had more to say regarding this aspect, but for some reason, it seems to be one of the most stable and reliable energy commodities. Distillates are finally seeing a few builds, but domestic inventories are still much lower than the 5-year average and only make up roughly 28 days of emergency supply. Hopefully, we see this commodity continue to build.
Overall this is a set of circumstances we have become accustomed to at this point. Increasing commodity prices, steadily growing interest in drilling, but tight commodity supplies domestically and globally. Hows about we get into some news?
Our first story is actually very refreshing considering trends as of late. The Biden Administration is looking at more solutions for lowering gas prices and is considering restarting idled refineries. For those of you who don’t know, lots of refineries closed during the pandemic because… well it was really hard to turn a profit, even without environmental activist organizations out for blood. Since March of 2020, roughly 1 million barrels per day of refining capacity has been lost. Globally it is estimated that the number is closer to 2.13 million, so kind of crazy to think that the US is responsible for 50% of that. So far the greatest solutions have been to release a combined 230 million barrels of emergency reserves from the SPR, but the administration is already looking to refill that capacity even though commodity prices have climbed higher since then. While I am more optimistic about this solution than the SPR releases, I am still skeptical of its efficacy. How long does it take to get a refinery back up and running? Thankfully they are already tooled to produce gasoline from Texas oil, but we still need executive personnel, labor (that is hopefully available and already trained), and a total recommissioning that will take months. I feel the shortest possible time frame to have one of these up and running again is 10 months, and even then we need to get several of these back up at one time. This is a bit of a hurdle we have analyzed already. The Energy Department has been asking domestic oil companies to boost production, but getting new hole drilled, completed, and producing takes time… lots of time. I fear that this is too little effort too late and may lead to 2-5 years of hyperinflated energy prices which, in turn, lead to general hyperinflation. Who is to say the government won’t start rationing energy supplies when things get really tight, although the people being rationed had little to do with the energy policies that got us here. There are a plethora of outcomes ahead of us both positive and negative, but it does seem like the solutions being proposed are doing a better job of actually identifying and resolving the root causes. I’m still hopeful for a near-future of abundant and cheap energy.
For our next story, we need to take a look at the EU’s latest diluted efforts of banning Russian energy. While much of the EU was pushing for a full ban, heavily-dependent countries like Hungary begged to not shut off gas flows from Russia. The initial proposal was adjusted to a full ban on seaborne imports by the end of the year with pipeline crude and gas excluded… for now. This of course is why we have seen a jump in both WTI and Brent prices this morning. Folks are expecting even tighter supplies and are now looking to OPEC+ who meets on Thursday. Even that organization has made it clear that they will not be adjusting their production plan anytime soon which consists of planned moderately monthly increases, but ultimately result in a failure to do so. I think this will be a big week for energy as this ban may cause Russia to do something rash themselves. Russia has been stopping gas deliveries to a few regions here and there and has recently ceased all deliveries to the Netherlands. Their message is clear, “Pay in rubles, or leave us alone.” Hell, I wouldn’t be surprised if Russia themselves replied to the maritime ban by shutting off their pipelines to the rest of Europe. After all, they are selling massive amounts of fuel at incredible discounts to India, China, and other folks while still making money. The ruble’s strength is improving, and will likely continue to do so as long as this region remains dependent on Russian energy. This complex game of energy chess is not over yet, but more and more pieces are falling.
But folks that is all we have for you today. Since this episode is coming out a little bit later, we have a slightly skewed content schedule for the week, so make sure you are subscribed to RARE PETRO on YouTube. We are releasing a compilation of our favorite moments of the Wacky World of Energy so far, and boy has there been some good ones. You can find us simply by searching for RARE PETRO on YouTube, or you can keep up to date with all content by following us on LinkedIn. Thanks for tuning in and joining me as we keep becoming more established and well-informed energy professionals. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!